The only investment advice you will ever need

One day when my daughter was about seven, we were watching TV together and an advertisement for a psychic came on. Miss Cleo, the ad claimed, could tell you all about your future. “Can I call?” my daughter begged.

“No,” I told her. “Let them call you.”

She was puzzled. “How would they know… Ah.” She got it. If these psychics were so expert at seeing the future, divining a customer’s phone number should be no difficulty at all. She was very impressed by the solidity of this logic. From then on, whenever the ad would repeat, she would rub her temples and intone, “Call me, call me.” A little girl’s mockery, sweetened with a tiny dose of hope. They never called.

I see a different kind of psychic on TV all the time now: the investment expert. This stock is a “hold”, that stock is a “buy” – because they know that this stock is stable, that stock will go up, in the future. Some of these experts even do call me, having obtained my number not via voices from Beyond, but from services that sell such information.

They obviously do not know the future. If they did, they would not tell me: they would make the investment quietly and reap more money than they could ever make advising others.

Let me tell you the truth. This has always been the truth and always will be: every liquid, passive investment has the exact same expected return. That expectation is, right now, around 7%.

Some stock might double your money? Maybe, but it’s almost as likely to lose it for you. Some bond is absolutely reliable? Well, you aren’t getting any more, or any less, than 7% out of it.

In this context, liquid means that people can easily get in and out of the investment. The necessary consequence of liquidity is that the price stays more or less sane. If, for some reason, a stock could really double your money, buyers would flood it, and drive the price up until it was no better than any other stock; same with a bad stock, everyone would dump it until the price became reasonable.

Eventually, and in today’s computer-driven markets, “eventually” means in a few second, liquidity equates to efficiency.

You can choose the risk profile you like. If you are investing mad-money, just for the heck of it, you can invest in some intensely risky stock that might make huge returns. If it’s money you need, you can invest in US government T-bills. Very different range of results, but the same expected results.

So the investment advice? There are only two possibilities, and you can divide up your cash between them.

One is to stick with liquid investments. Then, it barely matters the details. Pick a few vehicles where you like the risk profile and face very low transaction fees. In practice, that comes down to a fund of one sort or another. Boring, I know, but the money you make will be interesting.

The other is illiquid investments; that is, investments you make directly instead of through a large market. The two kinds of illiquid investments are called passive and active, but if the investment world were honest, would be called, “probably stupid” and “possibly not stupid”.

Passive investment, you give some guy cash and he promises to do his best to make more money for you in return. It is basically “Jack and the Beanstalk”, except you usually only end up with beans.

REIT are the king of the passive investments. You put some money in, and the Real Estate Investment Trust builds a building or a shopping mall. Sure, some of these make money, but why, exactly, would you expect that the one that you, who knows nothing about REITs, picks will be a good one?

Passive investors are just begging to get their throats cut. For every Doctor’s Associates, a holding company that was formed to oversee the expansion of Pete’s Super Submarines chain (and thereby pay the founder’s med school tuition, hence the name) and did very well after the renamed the restaurants “Subway”, there is a Bernie Madoff, who ran an out-and-out Ponzi scam, paying off early investors with the funds from later investors. Without the wisdom of the crowd, the millions of people constantly investigating and analyzing, you have no way to distinguish good illiquid investments from bad ones.

Which leaves active investment. Instead of investing in a partnership that is going to build a shopping mall, build a house; instead of investing in a company that trades in gold, open a jewelry shop. Do something where you personally can operate the investment.

It is easy enough to distinguish a good active investment from a bad one: look in the mirror. Are you a better landlord than average? A better plumber, a better dentist? Whatever you do, do you do it better than most people?

If so, put most of your money in yourself. If you are a good dentist, enlarge your practice; if you are an exceptional plumber, buy more trucks and take on more employees. Whatsoever thy hand findeth to do, do it with thy might.

But, if you are only mediocre – and be very, very honest with yourself – if you are only run-of-the-mill, average, work-a-day, put all your extra money in mutual funds, where it will grow 7%, every year.


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